Keybridge Capital Limited

Media Releases

2010 Annual General Meeting, Chairman's Address
10.00 am Wednesday, 29th September 2010
Keybridge Capital Limited, Level 26, 259 George Street, Sydney NSW 2000

Before moving to the formal business of the meeting, I would like to comment on Keybridge's performance for the 12 months to June 2010 and then share with you our views on the outlook for the Company. Ahead of that, however, it would be appropriate for me to comment on the changes in the composition of the Board that occurred earlier this month.

As was communicated to the market, two of our non-executive directors, Michael Perry and Cass O'Connor, resigned from the Board on 15 September 2010. It became clear that the harmony within the Board was not what it should be. It is important to point out that this lack of harmony did not relate to a lack of agreement at the Board about the Company's strategy, major transactions or the financial accounts. This notwithstanding, it did run the risk of distracting the Company from its core objectives over the next 12 months. Thus, whilst not welcomed, the changes at the Board will assist the Company to remain focused at this key time. I would like to take this opportunity to thank Mike and Cass for their contribution to the Company.

The resignation of the two directors meant that we had two remaining directors. Pending the identification of replacement directors, we have appointed Mark Worrall, one of our senior executives, to the Board.


Let us turn now to a review of Keybridge's performance over the past 12 months.

Keybridge Capital has a portfolio of investments with a focus on the asset classes of property, aviation, shipping and infrastructure. It also has a number of lending transactions.

Some of Keybridge's investments are senior loans, ranking in priority ahead of other creditors and equity; some are equity, with Keybridge being the owner, or co-owner, of the relevant asset. The majority of the Company's investments, though, are either mezzanine loans, or preference equity, ranking ahead of equity, but behind senior debt.

Over the past two years, the global financial downturn and its flow-on effects have had major impacts on the business operations and financial health of Keybridge Capital. These impacts are continuing, with prices in asset markets still to experience a sustained recovery and senior bank debt tending to remain in short supply.

Keybridge incurred a net loss after tax for the year to 30 June 2010 of $49.9 million. An operating profit of $7 million was offset by foreign exchange losses of $12 million, asset impairments of $33 million and a net write-down of deferred tax assets of $12 million.

The foreign exchange loss in 2010 reflects the fact that, since the restructure of our bank debt in mid-2009, Keybridge has been unable to access foreign exchange hedging contracts from its banks. Of the Company's total assets as at 30 June 2010, approximately 79% were denominated in US Dollars, with a further 4% in Euro. Of the US Dollar assets, approximately two-thirds were hedged by debt also denominated in US Dollars. For the remaining, unhedged component of foreign currency assets, Keybridge's profitability is subject to variability from changes in the value of the Australian Dollar against the US Dollar and, to a smaller extent, the Euro.

Over the course of the 2010 financial year, the Australian Dollar appreciated against those two currencies, leading to a loss in value of the unhedged foreign currency assets. This appreciation of the Australian Dollar, unfortunately, has continued so far in 2011. There has been talk of the Australian Dollar reaching parity with the US Dollar. If it were to do so, Keybridge would incur an unrealised foreign exchange loss of approximately $10 million compared with the position at our last balance date.

The Company's income tax expense in 2010 was a result of the previously recognised deferred tax asset being written down to zero in the first half of the year. This decision was taken because of the uncertainty of being able to utilise the tax benefits over time. For this same reason, the Company has not recognised any new tax credits in 2010, despite incurring an accounting loss.

As at 30 June 2010, the Company's balance sheet was composed of total assets of $233 million, funded by liabilities of $154 million and shareholders' funds of $79 million. This level of shareholders' funds equated to net tangible assets of 46 cents per share.

The Company's assets are now 60% composed of mezzanine loans in Aviation, with Lending and Shipping together representing a further 29% of assets. The aviation asset class, therefore, is now the most important for our future progress. This industry has been impacted over the past two years by reduced airline profitability, falls in the secondary market prices of aircraft and a reduced availability of senior bank debt. The outlook, however, is beginning to improve, with passenger and freight traffic increasing, and there are signs that improvements in aircraft markets may occur over the next couple of years.

We are focused on managing the business to preserve as much net value for shareholders as possible. We are seeking to reduce borrowings by accelerating the realisation of investments where practicable, and we are ensuring that our management team is doing all that it can to maximise the ongoing value of remaining investments.

As we move forward, the carrying values of our aviation and shipping investments must be subject to uncertainty simply because market conditions still do not allow them to be realised at fair values. More positively, there are prospects in some of our other investments for outcomes better than our current carrying values. On balance, however, we need to remain cautious because of the challenges of realising the bulk of our investments in the shorter term.

Of the Company's total liabilities as at 30 June 2010, $145 million represented bank borrowings. Under revised terms for our banking facility implemented in the first half of the 2010 financial year, we are required to follow a cash sweep mechanism that does not permit new investments or dividends to shareholders. Since the new arrangements were implemented, we have achieved debt repayments in advance of what is required. In the period to 30 June 2010, minimum required debt repayments were $30.5 million; those actually achieved were $64.0 million. We anticipate that further repayments of $6 million will have been achieved by the beginning of October.

A major challenge for the Company has been the deficit between its regular cash investment income and its fixed commitments of operating costs and interest expense. As the global financial crisis deepened, many of Keybridge's transactions began diverting available cashflow to accelerate repayment of transaction-specific senior debt. This caused cashflow distributions to Keybridge from these investments to cease.

In the 2010 financial year, we received total cash income of $19 million, which more than accounted for operating and interest costs, which totalled $18 million. Of this cash income, however, $9 million was generated from the repayment of investments. Regular, interest-style cash income was insufficient to cover our fixed commitments. This situation continues to prevail.

The Company has a good working relationship with its lending banks, and this has allowed Keybridge to realise investments in an orderly fashion. Our corporate debt facility matures in June 2011, and our key objective in the coming year will be to achieve ongoing terms from our lenders that ensure a continuation of this orderly approach. This will permit the Company to optimise investment values. In particular, it will enable the Company's shipping and aviation investments to be realised over the medium term as market conditions improve.

For the foreseeable future, we will continue to guide the Company to realise investments in an orderly manner in order to repay its corporate borrowings. Until this occurs, dividend payments are unlikely to resume. Throughout this period, we will continue to provide regular and transparent communication to stakeholders on the financial position of the Company.

Looking forward, whilst there is considerable uncertainty as to the timing of improvement in asset markets, and in particular the shipping and aviation industries, we can say that these markets have tended to normalise over time. This provides us with confidence that Keybridge Capital should be able to return value to shareholders in due course.

I thank you for your support as we seek to position Keybridge Capital for a meaningful recovery.


Keybridge Capital is a financial services company that has invested in, or lent to, transactions which predominantly are in the core asset classes of property, aviation, shipping and infrastructure.

For further information, please contact:

Mark Phillips
Managing Director
Tel: +61 2 9321 9000